Israel’s economy under war: macroeconomic and geopolitical developments - Weekly report, March 20, 2026
Headlines:
- Israel struck major energy infrastructure in Iran, including the South Pars gas field, and Iran retaliated by targeting energy facilities in Qatar and Israel, including refineries. At the same time, Iran continues to launch limited, but more advanced missiles, creating repeated disruptions to daily life.
- Oil prices rose sharply during the week, with Brent reaching around $107 per barrel. Markets have started pricing a prolonged campaign and the risk of escalation into an energy war.
- The current thinking in Netanyahu’s circle is to hold elections on their scheduled date of October 27, 2026, rather than call early elections, to avoid dissolving the Knesset and to complete a full term.
- The key pivot is the state budget: if the 2026 budget is approved by March 30, the Knesset will not automatically dissolve, allowing Netanyahu to retain control over the election timing.
- The conscription (draft) law is being postponed to secure the budget, with plans to revisit it after the war; however, there are growing assessments, even within the coalition, that under current conditions the law may not pass at all.
- Israeli financial markets showed resilience this week, with equity indices rising by around 2%–3.3%, reversing part of the decline seen in the second week of the war. The shekel remained relatively stable at 3.09–3.12 per dollar, while CDS spreads declined to around 110–120 bps—indicating that markets are not pricing a severe deterioration scenario at this stage.
- Economic data prior to the war with Iran point to moderate expansion, with the BoI’s activity index rising by 0.2%, but still below trend.
- At the same time, surveys and high-frequency indicators for the period of the war (March 2026) point to a short-term slowdown. CBS surveys indicate that around 25% of firms are operating at minimal capacity, with the impact particularly pronounced in the services sector. The loss of output at the current level of economic activity is estimated at around NIS 2.5 billion per week, equivalent to roughly 2.5% of weekly GDP.
- Fiscal conditions have come under increased pressure, with the deficit projected at around 5.2%-5.5% of GDP in 2026. This reflects potentially lower tax revenues alongside higher war-related spending of NIS 25-35 billion, with further risks of a higher deficit if the war continues.
- The external position remains strong, with the current account surplus widening to $3.4 billion in Q4 and a $6 billion surplus in goods and services. Strong high-tech exports continue to support the balance of payments and provide underlying support to the shekel.
- Inflation stood at 2.0% in February, but higher oil prices are expected to push inflation upward in the near term. March CPI is expected to rise by 0.5%, while April could increase by over 1% if energy prices remain elevated.
- The Bank of Israel is expected to keep the policy rate at 4.0% in the near term, with rate cuts pushed back due to higher inflation risks and geopolitical uncertainty. Easing is now expected only later in 2026, alongside a steeper yield curve.
Economic data expected this week:
On Monday (March 23), the CBS will publish labor market data from the Labor Force Survey for February, including the unemployment rate. The data are expected to continue to reflect pre-war conditions, with unemployment likely remaining low at around 3.0%.
On Tuesday, data on overnight stays in tourist hotels will be released. This indicator is expected to remain relatively weak, reflecting the ongoing impact of the security situation on inbound tourism, even before the latest escalation.
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